SECTION 2. BACKGROUND

.01 The Internal Revenue Service (IRS) and the Treasury Department recently issued final regulations under §§ 1.162–3, 1.162–4, 1.263(a)–1, 1.263(a)–2, and 1.263(a)–3 (T.D. 9636, 2013-43 I.R.B. 331, 78 Fed. Reg. 57686) (the final tangible property regulations). Section 1.162–3 provides rules for amounts paid or incurred for materials and supplies. Section 1.162–4 provides rules for amounts paid or incurred for repairs and maintenance. Section 1.263(a)–1 provides general rules for capital expenditures. Section 1.263(a)–2 provides rules for amounts paid or incurred for the acquisition and production of tangible property. Section 1.263(a)–3 provides rules for amounts paid or incurred for the improvement of tangible property. The final tan

gible property regulations generally apply to taxable years beginning on or after January 1, 2014, but also permit a taxpayer to choose to apply these sections to taxable years beginning on or after January 1, 2012. Alternatively, the final tangible property regulations permit a taxpayer to apply the temporary regulations under §§ 1.162–3T, 1.162–4T, 1.263(a)–1T, 1.263(a)–2T, and 1.263(a)–3T (T.D. 9564, 2012-14 I.R.B. 614, 76 Fed. Reg. 81060) (the temporary tangible property regulations) to taxable years (or where applicable, to amounts paid or incurred) beginning on or after January 1, 2012, and before January 1, 2014.

.02 Except as otherwise expressly provided by the Internal Revenue Code or the regulations thereunder, section 446(e) and § 1.446–1(e)(2) require a taxpayer to secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes.

.03 Sections 1.162–3(i), 1.162–4(b), 1.263(a)–1(g), 1.263(a)–2(i), and 1.263(a)– 3(q) of the final tangible property regulations provide that a taxpayer seeking to change to a method of accounting provided in the final tangible property regulations must secure the consent of the Commissioner in accordance with the requirements of § 1.446–1(e).

.04 Sections 1.162–3T(i), 1.162– 4T(b), 1.263(a)–1T(f), 1.263(a)–2T(j), and 1.263(a)–3T(o) of the temporary tangible property regulations provide that a taxpayer seeking to change to a method of accounting provided in the temporary tangible property regulations must secure the consent of the Commissioner in accordance with the requirements of § 1.446– 1(e). .05 Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the terms and conditions necessary for a taxpayer to obtain consent to change a method of accounting. Rev. Proc. 2011–14 provides procedures by which a taxpayer may obtain automatic consent from the Commissioner to change to a method of accounting described in the APPENDIX of Rev. Proc. 2011–14. A taxpayer complying with all the applicable provisions of Rev. Proc. 2011–14 obtains the consent of the Commissioner to

change its method of accounting under section 446(e).

.06 Section 3.01 of this revenue procedure modifies the APPENDIX of Rev. Proc. 2011–14 to amend existing method change procedures to be consistent with both the temporary and final tangible property regulations.

.07 Section 3.02 of this revenue procedure modifies the APPENDIX of Rev. Proc. 2011–14 to provide new method change procedures consistent with both the temporary and final tangible property regulations.

.08 Section 11.01 and 11.02 of the APPENDIX of Rev. Proc. 2011–14 provide procedures by which a taxpayer may obtain the automatic consent of the Commissioner to change to certain uniform capitalization (UNICAP) methods of accounting. These procedures do not apply to a change to a reasonable method, within the meaning of § 1.263A–1(f)(4), to properly allocate direct and indirect costs among units of property produced during the taxable year unless the methods are specifically described in § 1.263A– 1(f)(2) or (3). .09 The IRS is aware that, as a result of applying the final tangible property regulations, taxpayers may want to change to a reasonable method, within the meaning of § 1.263A–1(f)(4), other than the methods specifically described in § 1.263A–1(f)(2) or (3) to properly allocate direct and indirect costs among units of property produced during the taxable year. To align the filing requirements for certain changes in method of accounting for amounts paid to acquire, produce, or improve tangible property with a change to a reasonable method described in § 1.263A–1(f)(4), section 3.02 of this revenue procedure adds section 11.09 to the APPENDIX of Rev. Proc. 2011–14 to provide automatic consent for changes to a reasonable method of accounting under section 263A, provided certain limited conditions are met.

.10 The IRS is aware that questions have arisen regarding whether the capitalization rules of section 263A(b)(2)(A) apply to real property acquired by certain taxpayers through a foreclosure proceeding, or a deed-in-lieu of foreclosure transaction. Currently there is no automatic consent procedure for a change in method

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of accounting to stop capitalizing under section 263A(b)(2) costs of acquiring and holding property obtained through foreclosure (or similar transaction). To facilitate a change in method of accounting in this situation, section 3.02 of this revenue procedure adds section 11.10 to the APPENDIX to provide automatic consent for a change in method of accounting to an otherwise permissible method of accounting that does not capitalize under section 263A(b)(2) amounts for acquiring or holding real property obtained through a foreclosure proceeding, a deed-in-lieu of foreclosure transaction, or another similar transaction.

.11 Section 3.09 of the APPENDIX to Rev. Proc. 2011–14 allows taxpayers in the business of transporting, delivering, or selling electricity to change their method of accounting to the safe harbor method of accounting described in Rev. Proc. 2011– 43. Under Rev. Proc. 2011–43, the scope limitations of section 4.02 of Rev. Proc. 2011–14 do not apply to an electric transmission or distribution company that changes to the method of accounting provided in Rev. Proc. 2011–43 for its first or second taxable year ending after December 30, 2010. Under Rev. Proc. 2012–39, 2012–41 I.R.B. 470, the scope waiver limitation was modified to include the first, second, or third taxable year ending after December 30, 2010.

.12 The IRS is aware that a number of electric transmission and distribution companies still have not had time to change their method of accounting to the safe harbor method of accounting described in Rev. Proc. 2011–43. Accordingly, this revenue procedure modifies section 3.09 of the APPENDIX of Rev. Proc. 2011–14 to extend the waiver of scope limitations to the fourth taxable year ending after December 30, 2010.